Lessen the Risks When You Invest

The goal of attorney #b#Richard Pinto#/b# and his colleagues who are part of Griffin Technology Partners is to support emerging technologies and profit from them — but without many of the inherent risks of investing in an emerging technology business.

Pinto chairs the venture, technology, and entrepreneurial services practices at Stevens & Lee, 100 Lenox Drive, and is a member of its corporate finance and capital markets department. He is also senior advisor for technology-based deals for the firm’s investment bank affiliate, Griffin Financial Group, and heads the joint venture Griffin Technology Partners.

Pinto captures the standard risks of starting a technology business in a series of questions: Does the technology work? Is the intellectual property protectable? Does the management know what it is doing? Can the product be developed appropriately? Can it be sold and distributed correctly? Can the business grow? Can you find the right people to build the product and scale it up?

Rather than take all these risks by investing in a new company, Griffin Technology Partners is following a different approach called the innovation capital model. “We are looking to refine the risks, invest in a technology or a product, and be more efficient in our investment,” says Pinto. Pinto will talk on “The Current Investment Climate in Early-Stage Life Sciences and Innovation Capital as a New Model,” on Thursday, February 11, at 4 p.m. at the Center for Commercialization in New Brunswick.

Also speaking will be #b#Walter Greenblatt#/b#, managing director of Walter Greenblatt & Associates and a life science-focused. Cost: $40. Visit www.njef.org.

Pinto’s group starts the process like many investors do, by identifying a promising early-stage technology.

But instead of investing in the founder’s company, they follow a different approach designed to reduce risk:

#b#Identify a product or technology#/b#. The group will find a technology it believes will work and whose intellectual property is secure. “Not every technology and every company is appropriate for this,” says Pinto, who adds that he is looking specifically for projects that can be ready for production in about two years, with an investment of less than $2 million.

Medical devices and diagnostic kits are particularly good, says Pinto. So are software or drugs on the market in Europe but not in the United States. And, of course, the product’s creator must be interested.

“Some people are attracted,” he explains. “Others think, ‘I want to build my company and become the next Bill Gates.’”

#b#Find a buyer for the product or technology#/b#. Once they have found an appropriate product or technology, Griffin Technology Partners looks for a large company interested in acquiring the product and eventually bearing responsibility for marketing, sales, and distribution — functions it already has in place. If they find a large company that has a strong interest in buying the product, then Pinto’s group will take on the development risk and manage a virtual company to prepare the product for market.

#b#Create and manage a virtual company#/b#. The purpose of the virtual company is to develop the technology, create a prototype, and get regulatory approval. This is the point where Griffin Technology Partners, a virtual pledge company, asks investors to put in their money. It does not hold investors’ funds while looking for appropriate deals.

Pinto then brings in a few people from his stable of experts to manage the virtual company. They may be people in Griffin Financial Group, Pinto’s clients and former clients, or people who have been successful in pharma. He is also likely to bring in development and medical experts. All of his experts have other work, and managing these virtual companies should not be a full-time commitment, he says.

He uses contract manufacturers to make the product and clinical research organizations to do the study. “Everything is outsourced but management of the project,” says Pinto. “It can be very focused, but we don’t need to rent a building and hire a lot of people, which costs a lot of money.”

Suppose, for example, a professor at the University of Medicine and Dentistry of New Jersey has come up with novel design for a catheter and the university has filed a patent application. He needs $500,000 to work with a manufacturing company to figure out how to make the catheter effectively and consistently on a large scale. He will also need another $500,000 or $1 million to fund a clinical study where doctors, under controlled circumstances, test the catheter and prove it works better than others.

Pinto then plays go-between and finds a company interested in eventually buying the product. “When a professor has a prototype, everyone says, ‘That’s nice,’ but large companies are not interested,” Pinto says. “They say, ‘Let me know when you have something that is ready to go.’”

Pinto’s group tells the professor that they will develop the product to a stage where a larger company will be interested in taking it over. Rather than pay a CEO’s salary, they will pay be able to pay less to part-time experts.

“We are trying to limit the project to a defined scope,” says Pinto. “We will develop the product and sell it, not figure out how to sell it to all the doctors in the United States. We let someone else do that who has the expertise.”

From the founding scientists’ perspective the virtue, says Pinto, is that they don’t have to worry about the hassles and risks associated with building a company, like recruiting people who know what they are doing, fundraising, and making deals. Instead, he continues, they just contribute the technology and consult on how to get it through development as quickly as possible.

Pinto grew up in Morristown. His father was an entrepreneur who started and ran a number of small businesses. “When I was growing up,” he says, “my father invested in and managed commercial real estate.”

Pinto graduated from Yale in 1975. He majored in psychology but wanted to be Renaissance man. “That’s why I became a lawyer,” he says, “because I thought it would give me more access to more different things.” He went to the University of Virginia School of Law, graduating in 1978.

Pinto got involved with businesses for a similar reason. “Why business?” he asks. “You get to live vicariously a lot of different lives.” His first law job was with Smith, Stratton, Wise, Heher, & Brennan in Princeton, and he stayed with the firm until 2003, when Stevens and Lee made him an offer he could not refuse. In fact, the entire firm was invited to join, but some of the lawyers decided it suited them and the insurance coverage work they did to stay small.

Pinto has worked with at least 50 different pharmaceutical, medical device, and life science companies in the course of his career. Two particular experiences moved him toward the innovation capital model.

The first was his work with Alteon, a darling of Wall Street in the early 1990s. Pinto functioned as the de facto vice president for business development, traveling around the world with the CEO.

But after 20 years and an investment of $500 million, Alteon was unsuccessful in getting any drugs to market. “It was a great post-graduate training experience for me,” says Pinto. Biggest lesson: “You don’t get to do over a study that cost $100 million. If you fail, it is too late.”

More recently, he was involved with a company that followed a process much like the innovation capital model.

It acquired the rights to a small orphan drug on the market in Europe for a couple million dollars, ran a study, and in a couple of years was able to sell the rights to a large company that markets the product for a great return. “People made a lot of money,” says Pinto.

“Rather than raising hundreds of millions, someone was successful on a personal, economic, and ‘benefit of mankind’ basis by being more circumspect, savvy, and efficient.”

So far Griffin Technology Partners, which started a year ago, has no successes to report. It has reviewed 12 projects and passed on all of them.

Because no one is devoted to this effort full time, Pinto’s group has the luxury of being careful and waiting, with the goal of eventually doing maybe one or two deals a year. “You have to have a perfect storm in every way,” says Pinto.

“We are looking at some now that we feel good about, but when you’re doing something new, particularly a pledge fund, where people give you money when you show up with the right thing, the first couple have to be pretty good or they won’t give you money next time.”